Agenda Item No: 6.1 Enclosure: 3

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1 Date of Meeting: 14/02/2012 Intended Outcome: For noting Agenda Item No: 6.1 Enclosure: 3 For information Title of Report: Acquisition of North Cumbria University Hospitals NHS Trust Aims: To provide the Trust Board with information on the acquisition process. Executive Summary For decision The Trust Board considered options for achieving Foundation Trust status in February 2011 and decided that the preferred option was to seek a partner through acquisition. The Trust s Strategic Vision for the acquisition is described below: We will deliver clinically sustainable and high quality acute services from two hospitals in North Cumbria by becoming part of an existing Foundation Trust which delivers high quality, safe patient care, and is financially strong. Together we will develop an organisational approach and critical mass which will enhance access to acute healthcare for all patients across our catchment areas by combining the synergies of our clinical services and teams, developing high quality innovative service models and new integrated patient pathways. The Trust Board proceeded to commission an open, fair, transparent and competitive process to identify a preferred partner. The process has been reviewed in detail by the Audit Committee in January which was assured that it was consistent with competition requirements. Legal advisers have also provided assurance on the process. The Trust Board met on 31 January 2012 to review the entirety of the evaluation process undertaken in Phase 1 including: Deloitte Report (November 2011) summarising the financial and non-financial evaluation Stakeholder feedback following the Stakeholder event held on 12 October 2011 The outputs of the Board to Board meetings with the bidders and The Deloitte Report (January 2012) on the Supplementary Process and Financial Questions The Board recommended the bid from Northumbria Healthcare NHS Foundation Trust following careful and detailed consideration of the information. This recommendation has been widely supported by clinicians, staff, patients, stakeholders and the clinical commissioners for Cumbria. This report describes: The Supplementary Process and Financial Questions including the review of the bidders submissions The Trust Board recommendation that Northumbria bid was the preferred bid Next steps required to complete the transaction Financial negotiations involving NHS Cumbria, Cumbria Clinical Commissioning Group and the Trust will be led by the SHA. It is important to note that it is only at the successful conclusion of these negotiations that the Trust will have a deal for the acquisition to be implemented, subject to regulatory and DH approval. 1

2 A co-ordinated and detailed plan for the next steps will be developed with the preferred bidder following the negotiation period. The acquisition process has been monitored against the Tripartite Formal Agreement (TFA) by the Strategic Health Authority through monthly FT Pipeline Reports. The current DH RAG status of the acquisition is amber/green. Supplementary Process and Financial Questions The Supplementary Process was initiated following the November Board meeting when the Trust Board decided to extend the Phase 1 process and proceed to test the financial viability of the bids received, thereby dispensing with the requirement for a second phase of the process. The purpose of this change in process was to enable the Trust Board to respond to stakeholder and bidders feedback on timescales and arrive at a prompt decision on the preferred bidder by the end of January It required bidders to develop financial projections for the proposed acquisition and produce three key outputs with supporting information: 1. Base Case financial projections ( as is financial position) 2. An adjusted case (post-merger savings and costs) and 3. An assessed viability position (which involves identification of required transitional financial support). Each bidder was asked to support each output with a description/commentary on the following: Rationale for the assumptions, i.e. an explanation of the assumption in the bidder s model Evidence to support assumptions, i.e. previous delivery, trend data or benchmarks Critical dependencies required to support the bidder s assumptions and The bidder s level of confidence relating to the assumption and potential downside. Prior to the Trust Board meeting on 8 November both bidders were asked by the Project Director to identify information requirements and clarification meetings for the next stage of the process. Northumbria Healthcare provided a detailed list of due diligence information and meeting requests whilst the Alliance declined this request preferring to identity its requirements after 8 November. In the intervening period the Trust populated its Virtual Data Room with a comprehensive range of detailed information on clinical services, contracts, governance information, assets, etc. In addition, both bidders were offered identical clarification meetings with a wide range of Trust staff and commissioners. The Trust also commissioned a Vendor Due Diligence report from KPMG which was issued to bidders on 18 December. KPMG also arranged clarification meetings with both bidders. The Trust established a Review Panel to assess the reasonableness, clarification and the level of risk of each bidder s assumptions, particularly where there was potential for a material positive or negative impact on the viability position. The aim of the clarification process was to ensure that the assumptions within the submission were understood by the Review Panel and therefore appropriately adjusted. The submissions included a number of clinical and non-clinical assumptions. Review Panel members were asked to familiarise themselves with the relevant assumptions relating to clinical, operational or HR models prior to the meeting. The Director of Finance chaired the Review Panel and the Trust s acquisition advisors. Deloitte and Wragge & Co were in attendance to support the clarification meeting and moderation process. A report on the conclusion of the review of the bidder s submissions and the subsequent analysis of the bidder s proposals for transitional financial support was presented by Deloitte. 2

3 Trust Board Recommendation on the Preferred Bid A private meeting of the Trust Board was arranged for 31 January 2012 to review the entirety of the bidder s responses to the Phase 1 evaluation. The bidders were the Alliance of Cumbria Partnership and Newcastle upon Tyne Hospitals, and Northumbria Healthcare. All members of the Board attended the meeting having received individual briefing papers on the entirety of the Phase 1 evaluation and the Deloitte report on the bidder s submissions to the Supplementary Financial Questions. The SHA Director of Provider Development, Deloitte and Wragge & Co attended the meeting to provide external advice on the process. Trust managers were also in attendance to provide the following support: The lead Director for the acquisition project was present to answer any specific Trust Board questions on the Trust s acquisition process The Company Secretary and Head of Corporate affairs attended to ensure the meeting was conducted in line with the Trust s standing orders (including minutes) The Head of Communications attended to ensure press briefings for 1 February accurately reflected the Trust Board s decision Information on both bids was reviewed in detail by the Trust Board. Following the Board s discussion of the key aspects of each bid a unanimous vote/decision was recorded to recommend the Northumbria bid. Next Steps Required to Complete the Transaction It is important to note that the Trust Board decision is a recommendation to the SHA of its preferred FT acquirer. It will not be until the successful conclusion of financial negotiations that the Trust can say it has an agreed deal with the chosen FT for the acquisition to proceed. The final decision will be made by the Secretary of State subject to regulatory approval from Monitor and the NHS Cooperation and Competition Panel (CCP). In addition to each of these steps representing a component of the acquisition process they also constitute a risk to the acquisition not proceeding. Although estimated timescales have been included, not all the steps are sequential and some can be actioned concomitantly, the latter are indicated by having the same number. It is estimated that the overall timescale for successfully completing the steps below and securing final approval for the acquisition is likely to take until September-October Step 1 Negotiation (assuming completion by February 2012) Commence negotiations on the amount of transitional financial support the acquiring Foundation Trust (FT) will require (and over what period) for it to make the acquisition work from the perspective of all NHS players and regulators. The negotiations, which essentially will be between the FT and Cumbria PCT and CCG ( the commissioners ) will be led by the SHA and also include NCUH ( the Trust ). The Trust will be included because of the contribution that financial turnaround will make over time to minimising 3

4 the required transitional financial support. During this period the FT is also likely to commission its own due diligence 1 to augment the conclusions of the vendor due diligence undertaken by the Trust for the stage prior to the 31 January. Agreement of the Trust s contract with commissioners for services to be provided in will overlap with the above process, and any transitional financial support agreed as part of that process will be included in the financial negotiations. The negotiations should also make clear any caveats or conditions to be contained in the transactions contract for transferring the Trust to the FT. Examples include required FT support for ongoing capital developments, service change(s) or maintaining access to certain services for geographical or other reasons. It is only at the successful conclusion of the negotiations that: there can be greater certainty of the acquisition proceeding and the following steps can be actioned with confidence. Step 2a CCP Assessment (estimated four months April to July/August depending on CCP timescales) Trust to commence dialogue with CCP 2 for this regulator to commence its assessment of the proposed acquisition on the maintenance of competition of healthcare providers for North Cumbria patients. The CCP process is two stages: phase one is 40 days and phase two (more detailed examination) is 80 days. Informal discussion with the CCP indicates they are very likely to run the two phases before they issue their conclusions and advice to the board of Monitor. The CCP process will include assessment of the acquisition process and discussion with, among others, the Trust and commissioners. The CCP s assessment is submitted to Monitor 3 with a recommendation as to whether the acquisition should proceed or not. Step 2b Transitional Planning (April onwards) A joint Trust-FT transactions group will be established to map the detail and steps for managing the transition of the Trust s workforce and assets to the FT when final approval for the acquisition is secured. Step 2c Management Contract (if agreed to commence circa April 2012 until final approval of the acquisition) Agree a management contract between the Trust and FT for the latter to assume day-to-day management of the Trust accountable to the current Trust Board until final approval for the acquisition from the Secretary of State and transfer of the Trust into the FT s ownership, when the Trust Board will cease to exist. A management contract will require agreement from the SHA and Monitor, which would not be automatic because it may be seen as anticipating regulatory and DH approval for the acquisition. 1 The examination of a potential target for acquisition or merger or similar corporate finance transaction, normally by a potential buyer. 2 The CCP helps support the delivery to patients and taxpayers of the benefits of competition by investigating and advising the DH and Monitor on potential breaches of the Principles and Rules of Cooperation and Competition. 3 Monitor was established in 2004 to authorise and regulate NHS foundation trusts. It is independent of central government and directly accountable to Parliament. 4

5 Conversely, a management contract would allow the FT to become more familiar with the Trust, its operations and staff, but it should be noted that in the period leading up to final approval of the acquisition any major changes proposed by the FT would require, in the first instance, approval from the Trust Board. Step 3 FT Integrated Business Plan (The time for this process is partly driven by the CCP s assessment timescale and can only be estimated to take some months) FT to commence preparation of an integrated business plan for submission to Monitor, the economic regulator for FTs. Specifically, the plan will have to demonstrate that the proposed merged entity will be able to satisfy Monitor s requirements with respect to: legal constitution and taking steps to ensure representative membership governance in accordance with best practice financial stability and remaining a going concern and provision of mandatory services. The plan will need to show the services that the new FT will provide, and how these will be organised and led. The plan should also demonstrate that the new organisation will generate a sustainable net income surplus by year three of the business plan and maintain a reasonable cash position. Unless there are exceptional circumstances, the financial risk rating in the first year must be a minimum of 3 4. The plan, along with the CCP s recommendations, will form the basis of Monitor s own assessment and conclusions for the proposed acquisition. Step 4 Business Case submitted for Secretary of State Approval (estimated August September 2012) Prepare interim and final business cases for the Secretary of State to approve the acquisition subject to regulatory and SHA approval. The process of preparing the business cases will be managed by the SHA. Step 5 Dissolution of the Trust and Business Transfer (estimated October 2012) Following final approval, the Trust s workforce and assets are transferred to the FT, the Trust Board is dissolved and the FT assumes ownership and control of the Trust within its own organisation. Conclusion The acquisition process which started in May 2011 has reached a conclusion on Phase 1 with the Trust Board recommendation on 31 January 2012 that the Northumbria Healthcare bid is the preferred bid. There now follows a detailed process to conclude financial negotiations on the level of supplementary financial support which will be required to support the acquisition. There is also a complex approval process required (involving the Cooperation and Competition Panel, Monitor and the Department of Health) before the transaction can be completed. The 4 Monitor rates financial risk on a scale of 1-5, where 1 represents the highest risk and 5 the lowest. A rating of 3 is defined as: Regulatory concerns in one or more components; significant breach unlikely. 5

6 timescales for the key steps in this process have been estimated, however, this is an evolving process with only a limited number of transactions completed in the past. In addition more detailed planning between the Trust and Northumbria Healthcare will be required to ensure the transaction meets the approval requirements and equally importantly establishes a new and integrated organisation to deliver the benefits from the acquisition. Specific implications and links to the Trust s Strategic Aims: Ensure we provide high quality, safe and effective care for all our patients including meeting essential standards of safety and quality as set out by the CQC Develop a viable integrated clinical strategy for secondary care services which is sustainable and affordable Develop a new healthcare facility in West Cumbria that is fit for the 21st century Achieve sustainable financial balance through the delivery of the Trust's internal Cost Improvement Programme, securing a viable contract income from our GP commissioners and contributing to the system wide cost reductions To develop and implement a successful merger or acquisition plan that enables the Trust to become part of an existing NHS Foundation Trust Recommendations: That the Trust Board: 1. Notes the Supplementary Process 2. Notes the recommendation that the Northumbria bid is the preferred bid 3. Notes the next steps and timescales Prepared by: Caroline Griffiths Director of Strategic Planning and Business Development Presented by: Dr Neil Goodwin Interim Chief Executive 6

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